Reality Check: Strapped States Cutting Unemployment BenefitsDuring the recession, states have run up a $30 billion debt to Washington because they haven't had enough funds to cover unemployment checks. Now they're cutting benefits at the same time federal payments are being reduced because of the sequester.

California saw unemployment benefit cuts of 18 percent go into effect this week, reducing checks for more than 400,000 people.

Douglas Dickens/iStockphoto.com

The jobs report for April showed some improvement — but not much — in the unemployment rate and the total number of unemployed workers.

It's not great news for people looking for work, and it's also not great for states. After years of persistently high unemployment, states have drained their unemployment trust fund accounts.

The result is that states collectively owe the federal government $30 billion — money that they are now having to pay back with interest.

"States are forced to come up with all sorts of strategies to pay the money back, but they are also rejiggering their entire systems," says Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments.

Even as the U.S. job market remains weak, more than a dozen states have cut unemployment benefits over the past couple of years. Most of them have reduced the number of weeks people can collect benefits.

"Rather than making serious fixes to their financing, states are targeting benefits and trying to shore up funds that way," says Claire McKenna, a policy analyst with the liberal National Employment Law Project.

The long-term unemployed are facing other problems. States generally pay for the first six months of unemployment benefits, with the feds picking up the tab for periods beyond that. Because of sequestration, those benefits also are being cut by 10 percent or more. Benefit cuts of 18 percent took effect this week in California, reducing checks for more than 400,000 people.

How States Went Broke

For decades, states have been offering benefit checks to the unemployed for 26 weeks. During recessions, Congress typically steps in and offers extended benefits for up to 99 weeks.

States are supposed to build up their unemployment accounts during good times by taxing employers, based on wages. But their tax rates vary.

Prior to the recession, most states lowered taxes on employers. Between 1995 and 2005, 31 states reduced unemployment insurance taxes by at least 20 percent, according to the Tax Foundation. That brought contributions down to 0.65 percent of total wages from 2000 to 2009 — a record low, according to NELP.

"States very aggressively slashed unemployment insurance tax rates, plus you had states enhancing benefits at the same time," says CanagaRetna. "Unfortunately, that causes a situation where you end up being broke."

Payback Time

Thanks to the 2009 federal stimulus law, states were able to borrow money interest-free to make up their gaps. But now Washington wants its money back.

States now owe the Treasury $29.8 billion. That amount has actually dropped from $37.3 billion back in November 2011.

In part, that's because the unemployment rate has come down. But it's also because states have been paring benefits.

States such as Missouri, Michigan and South Carolina reduced the number of weeks they were willing to pay for, to 20 weeks from 26 weeks. Other states, such as Florida, Georgia and North Carolina, will now use sliding scales, generally offering from 14 to 20 weeks of unemployment benefits, depending on the unemployment rate in the state.

"Everybody knew that cuts were going to have to happen, but the cuts that North Carolina implemented were unprecedented and the most stringent in the country," says Jeff Shaw, spokesman for the North Carolina Justice Center, which advocates for the poor.

Shoring Up The Funds

North Carolina not only limited the number of weeks of benefit checks but also cut weekly benefits, reducing the maximum amount people can receive from $535 to $350.

"I just thought it was bad policy for citizens that are already in a crisis situation," says Democratic state Sen. Earline Parmon.

She says North Carolina got itself into this mess by giving tax breaks to employers, and argues that it's unfair to fix the situation "solely on the backs of the unemployed."

But Republican Sen. Bob Rucho says "there were no easy solutions" for dealing with a debt to the federal government in excess of $2.5 billion.

The reduction in weekly benefits simply put North Carolina in line with other southeastern states, Rucho notes. He says his plan will allow the state to pay off its debt to Washington three years earlier, while also building up a billion-dollar trust fund for the next recession.

"We were stuck with a debt and no future, and now it seems we have it on the right path to be able to pay off future unemployment benefits," he says.

Limitations On Taxes

North Carolina employers warned that if their taxes went up, they wouldn't be able to hire more people, Rucho says. With unemployment high, most states have not wanted to raise taxes on employers. So the result has been those cuts in benefits.

Employers pay unemployment insurance taxes based on wages — but not all wages. The federal government requires states to tax only the first $7,000 in wages, a standard that hasn't increased in 30 years.

Some states, such as Oregon and New Jersey, impose taxes on more than $30,000 worth of wages. But the national average is about $13,000.

In New York, which owes the federal government $3.5 billion, the recent state budget increases the amount of wages subject to tax to $13,000, but very gradually — over a period of 13 years.

Georgia's unemployment law, while lowering the number of weeks people can receive checks, also increased the amount of wages subject to tax, to $9,500 from $8,500.

"In order to go forward and in order not to kill job growth, we had to do something," says Republican state Sen. Fran Millar. "I could pass $9,500. Could I pass $12,000? I don't know."